Shares digital

StreetTRACKS Gold Trust (GLD:NYSE) – $97.21, stop loss $77.7

SHARES SUMMARY

Surging food, fuel and commodity prices, coupled with further interest cuts in the USA, bolster gold’s status as an inflation hedge.

Business:

An investment trust designed to track the price of gold, net of the trust’s expenses.

Vital stats:

Market value: $20 billion

Net asset value: $20 billion

Historic PE (2007): 35.6

52 week high: $97.21

52 week low: $62.62

Yield 2008: n/a

All that glisters may not be gold, but the current bull run in the precious metal continues to line investors’ pockets worldwide. Gold, as priced by the afternoon London fix, is up nearly 10% this year already, and even hit an all-time high of $953 in February. By contrast, the FTSE World equities index is down 6%, when measured in dollars.

Finding the best approach to profit from these price rises is not always straightforward. Mining stocks can encounter political interference and the loss of vital licences, or technical problems which slow production. Peter Hambro Mining (POG:AIM) failed to meet its initial production targets from its Russian mines, for example, although the firm recently put forward what looks like a more realistic production goal of at least one million ounces a year by 2011.

Risk averse investors should therefore consider Exchange Traded Funds (ETFs). Often referred to as tracker shares, ETFs are in essence index funds which trade on the stock exchange as shares.

StreetTRACKS Gold Shares, which are known simply as Gold, listed in 2004 on the New York Stock Exchange Arca, which operates only online. The shares enable investors to participate in the gold bullion market without the necessity of taking physical delivery of gold, and to profit from movements in the gold price.

Gold currently has 639.44 tonnes, or 20.6 million ounces, with a value of market value around $20 billion held in trust in its custodian’s vaults. A 633 page document on the website www.streettracksgoldshares.com even lists every single one of the trust’s gold bars, the purchase of which cost just over $12 billion, according to a recent regulatory filing. Further gold price appreciation will increase the value of these holdings, drive up the ETF’s net asset value (NAV) and make the share price rise.

Gold is the ultimate hedge against inflation, and this is a problem which looks unlikely to go away soon. Oil and soya beans have already set all-time highs this year, and metals and aluminium are bearing down fast on their record peaks. As a result, January saw UK consumer price inflation exceed the government’s 2.0% target by 20 basis points, Chinese inflation hit an 11-year high of 7.1% and EU inflation a 14-year high of 3.2%.

January also saw wholesale prices in the USA jump 7.5%, the fastest increase since 1981. Yet the US Federal Reserve looks set to cut interest rates when it meets on 18 March, even though chairman Ben Bernanke has already slashed them from 5.25% to 3.0% since last summer. This suggests the Fed is prepared to risk inflation as it tries to reflate the debt-saddled US economy.

Gold’s haven status should therefore continue to serve investors well through 2008. The precious metal is already setting record highs at around $970 per ounce and further gains look likely.

Investing in an ETF to get access to gold does have certain drawbacks. The fund charges 0.4% per year to cover storage, insurance, administrative and other costs. This fee is deducted from the value of the physical gold which backs each share, even if the title on each share remains one-tenth of an ounce of gold. But such ‘shrinkage’ seems a small price to pay for relatively low-risk exposure to what looks set be to a long-running bull market in the yellow shiny stuff.

by: Russ Mould